禮恩派 (LEG) 2018 Q4 法說會逐字稿

Greetings, and welcome to the Leggett & Platt, Incorporated Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Wendy Watson, Director of Investor Relations. Thank you. Ms. Watson, you may begin.

Good morning, and thank you for taking part in Leggett & Platt's Fourth Quarter Conference Call. I'm Wendy Watson. With me today are Karl Glassman, President and CEO; Matt Flanigan, EVP and Chief Financial Officer; Mitch Dolloff, EVP, Chief Operating Officer and President of the Furniture Products and Specialized Products segment; Perry Davis, EVP and President of the Residential Products and Industrial Products segment; and Cassie Branscum, Manager of IR.

The agenda for our call this morning is as follows: Karl Glassman will start with a summary of the major statements we made in yesterday's press release; Matt will discuss financial details and address our outlook for 2019; and finally, the group will answer any questions that you have.

This conference call is being recorded for Leggett & Platt and is copyrighted material. This call may not be transcribed, recorded or broadcast without our express permission. A replay is available from the IR portion of Leggett's website.

We posted to the Investor Relations portion of the website, yesterday's press release and a set of PowerPoint slides that contain summary financial information along with segment details. Those documents supplement the information we discuss on this call, including non-GAAP reconciliations.

I need to remind you that today -- remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties, and the company undertakes no obligation to update or revise these statements.

For a summary of these risk factors and additional information, please refer to yesterday's press release and the section in our 10-K and 10-Qs entitled forward-looking statements.

I'll now turn the call over to Karl.

Good morning, and thank you for participating in our fourth quarter call.

First, I would like to thank our dedicated fellow employees around the world for your efforts during this past year. They are very much appreciated.

We are pleased with our 2018 operational performance, despite the challenges we faced in some of our businesses, most notably, Home Furniture and Fashion Bed.

Fourth quarter sales increased 6% to $1.05 billion on flat volume. Raw material related price increases, net of currency impact, added 3% to sales growth and acquisitions also added 3%.

Fourth quarter earnings per share from continuing operations were $0.39. This includes several items outlined in yesterday's press release that amount to a $0.23 per share reduction in earnings.

Excluding these items, adjusted fourth quarter earnings increased 5% to $0.62 per share from $0.59 last year. This increase is primarily due to improved metal margins in our Steel Rod business.

In 2018, sales grew 8% to $4.3 billion, with organic sales up 6% from a combination of 3% volume growth and a 3% benefit from raw material related price increases and currency impact.

Acquisitions, net of divestitures completed in 2017, added 2% to sales growth. Whole year sales benefited from ongoing content gains and new program awards in Automotive, market share gains and continued shift to Comfort Core and Quantum Edge innersprings and U.S. Spring and strong growth in Adjustable Bed, Work Furniture and Aerospace. These improvements were partially offset by declines in other businesses, primarily Home Furniture, Fashion Bed and flooring products.

Full year earnings per share from continuing operations increased to $2.26 from $2.14 in 2017.

Earnings from 2018 include the fourth quarter $0.23 per share reduction just mentioned and a third quarter $0.01 per share benefit related to the Tax Cuts and Jobs Act for a net reduction of $0.22 per share.

Full year 2017 earnings included a $0.32 per share net reduction primarily from cost associated with the Tax Cuts and Jobs Act.

Adjusted full year earnings per share increased 1% to $2.48. Adjusted EPS benefited from improved mental margins at our steel mill and higher sales.

These improvements were largely offset by higher steel cost, including LIFO expense and the lag associated with passing along ongoing inflation.

In 2018, we made some important strategic moves that should reinforce achievement of our long-term financial goals.

In January, we acquired Precision Hydraulic Cylinders, a leading global manufacturer of engineered hydraulic cylinders primarily for the materials handling market. PHC is our first business in the hydraulic cylinder industry, a market we identified through our Styles of Competition analysis.

In November, we announced the acquisition of Elite Comfort Solutions, and we have completed the acquisition last month. ECS is a leader in proprietary specialized foam technology, primarily for the bedding and furniture industries. The purchase price was $1.25 billion and was financed through an expansion of our commercial paper program and the issuance of a $500 million 5-year term loan with our current bank group.

Through the ECS acquisition, we have gained critical capabilities in proprietary foam technology along with scale in the production of private label finished mattresses. Our combined expertise in spring and foam technology make us the leading provider of differentiated products for the global bedding industry.

ECS's annualized sales for the fiscal year ended September 2018 were $611 million, and we expect ECS to add approximately $675 million to sales growth in 2019. ECS is in our new Speciality Foams business unit within the Residential Products segment reporting to Perry.

As previously discussed, we continued an in-depth analysis of our Fashion Bed and Home Furniture businesses and initiated restructuring activity late last year.

Restructuring-related charges in 2018 were $16 million, and we expect an additional $17 million of charges in 2019. The restructuring activity should be substantially complete by the end of this year.

In 2019, we expect these acquisitions and Leggett initiatives to drive sales growth and increased margins. Matt will discuss our guidance for the year later in the call.

Finally, the quarterly slide decks that we posted to the Investor Relations website contains unit growth rates for innerspring and boxspring pieces within our Residential Products segment. Because of content gains including strong growth of our Comfort Core innersprings and other higher dollar value units, dollar growth and unit growth have become increasingly disconnected. Accordingly, beginning in the first quarter of 2019, we will stop reporting unit growth for innersprings and boxsprings. We will continue to provide dollar growth as we do for our other business units. With all -- I'll now turn the call over to Matt.

Thank you, Karl, and good morning everyone.

In 2018, we generated operating cash flow of $440 million, which, once again, included our typically strong fourth quarter cash flow performance.

We continue to have a strong and sharp focus on working capital management, and we ended the year with adjusted working capital as a percentage of sales at 10.6%.

We repatriated $141 million of offshore cash in the fourth quarter, bringing our full year total to $314 million.

In November, we declared a $0.38 per share quarterly dividend, a 6% increase versus the fourth quarter of 2017.

Our dividend payout as a percentage of adjusted earnings was 60% for 2018, at the top of our target dividend payout range of 50% to 60%.

Beginning in 2019, in conjunction with the increasing leverage from the ECS acquisition, we announced a modest change in our dividend payout target to approximately 50% of adjusted earnings.

We expect to continue increasing the dividend as we repay debt associated with the ECS acquisition.

At Friday's closing price of $40.97, our current yield is 3.7%, which is one of the highest yields among the 57 companies that comprise the S&P 500's Dividend Aristocrats.

For the full year, we repurchased 2.6 million shares of our stock at an average price of $43.10, and issued 1.2 million shares primarily for employee benefit plans and stock option exercises.

During the year, we acquired PHC and 2 small geo component operations. We also continued investing capital to support organic growth opportunities, primarily in Automotive and Bedding.

We increased the borrowing capacity under our commercial paper program from $800 million to $1.2 billion in connection with the funding of the ECS transaction.

We ended the year with debt at 1.9x our trailing 12 months adjusted EBITDA. After completing the ECS acquisition in January, our debt levels increased as expected to approximately 3.5x.

We are committed to maintaining a strong investment grade credit rating and expect to deleverage to a target ratio of debt to trailing 12 months EBITDA of approximately 2.5x by temporarily suspending share repurchases, reducing other acquisition spending and using our operating cash flow to repay debt.

We assess our overall performance by comparing our total shareholder return to that of peer companies on a rolling 3-year basis. Our target is to achieve TSR in the top 1/3 of the S&P 500 over the long term, which we believe will require an average TSR of 11% to 14% per year. While our recent performance has not met this target, we continue to strongly believe our disciplined growth strategy and prudent use of capital will support achievement of our top third goal over time.

Sales growth in 2019 will benefit significantly from the ECS acquisition. We also expect sales growth in Automotive, U.S. Spring, Aerospace and Hydraulic Cylinders, partially offset by planned declines in Fashion Bed and Home Furniture related to restructuring efforts and from less promotional activity in Adjustable Bed.

2019 sales are expected to be $4.95 billion to $5.1 billion, or up 16% to 19% over last year.

ECS should add approximately $675 million to sales. In addition to ECS, same location sales growth is expected to be flat to up 3%.

Earnings per share are expected to be $2.35 to $2.55, including approximately $0.10 per share of restructuring related cost. Therefore, adjusted EPS is expected to be $2.45 to $2.65, reflecting slightly higher organic sales and moderating steel inflation, partially offset by higher tax rate.

As we have previously stated, the ECS acquisition is expected to be neutral to EPS in 2019.

EPS guidance assumes a full year effective tax rate of 24% versus 20% in 2018. This higher rate reflects the nonreoccurrence of some valuation allowance releases we benefited from in 2018, a smaller expected stock compensation benefit in 2019, the impact of TCJA executive compensation limits and tax implications from higher interest expense due to the financing of the ECS transaction. We expect 2019 depreciation and amortization to approximate $210 million, net interest of approximately $95 million and fully diluted shares of $136 million.

Based upon this guidance framework, our 2019 full year adjusted EBIT margin should be 10.8% to 11.2%.

While we do not issue specific quarterly guidance, we expect revenue growth rates to be somewhat consistent across the quarters in 2019.

We expect adjusted margins in the first quarter to be lower than first quarter last year, in part due to the purchase accounting for acquired ECS inventory, and we expect year-over-year adjusted margins to be flat to slightly improving by the second half of the year.

Cash from operations should approximate $550 million in 2019. Capital expenditures should be near $195 million for the year and dividends should require $205 million of cash.

Our dividend payout ratio for 2019 is anticipated to be above our target of approximately 50% of adjusted earnings.

Our long-term priorities for use of cash remain: one, organic growth involving capital expenditures and working capital investments; two, dividends; three, strategic acquisitions; and four, share repurchases.

As previously stated, we will temporarily suspend share repurchases, reduce acquisition spending and prioritize debt repayment after organic growth in dividends. With those comments, I'll turn the call back over to Wendy.

That concludes our prepared remarks. We thank you for your attention, and we'll be glad to answer any of your questions.

In order to allow everyone an opportunity to participate, we request that you ask only one question and then yield to the next participant. If you have additional questions, you are welcome to reenter the queue and we will answer those questions as well.

Michelle, we're ready to begin the Q&A session.

(Operator Instructions) Our first question comes from the line of Susan Maklari with Crédit Suisse.

This is Chris Kalata on for Susan. Thanks for taking our questions. First question is just on the Industrial Products segment. You've been able to realize a significant amount of pricing in the second half of 2018. So I was just wondering, how much additional pricing are you expecting this year? And what benefit could that have to your margins?

Yes, Chris, we -- this is Perry Davis. We definitely saw a run-up last year in both scrap and particularly, in rod pricing. The -- we feel at this point in time that we are pretty much at the peak. We, in fact, saw some slight deflation in scrap inputs in January, which is a little uncommon. I don't believe we've seen a January decrease in scrap pricing since 2006. But overall, we believe that over the next few months our input cost and rod prices will remain relatively constant.

Okay. And then just for my second question, does your full year guidance -- does that include the impact of the full 25% tariff environment? And are you able to quantify what the incremental headwind would be between the 10% and 25%?

Chris, this is Karl. The answer to that is no. We don't know what to expect as it relates to tariff. We assume that if the tariffs are, in fact, increased to 25%, we'll pass them through. But in our top line forecast, they do not include the expansion of tariff activity. We just don't know.

Our next question comes from the line of Bobby Griffin with Raymond James Financial.

First of all, touch on the Automotive segment. And kind of see what the outlook is assuming your guidance for 2019 and how kind of the program wins trended in 2018.

Bobby, this is Mitch. I'll take that one. Of course, our Automotive business continues to perform really well, and our long-term outlook hasn't changed. Our strong pipeline of awarded future program continues to give us confidence in our goal of beating the vehicle production growth by 1,000 basis points. We've had double-digit increases in our new awards every year since I've been counting this since 2011; an overall CAGR of over 15% since that time. So we think the visibility that we have there, it really gives us a strong case to stand by our goal. For 2019, production is forecast to be up about 1% globally and about 0.6% in the major market. And we look at what we have net of coming online versus programs ending, we still feel confident in our double-digit target.

Okay. Does the production forecast assume any type of stimulate in -- for China automotive demand that they announced recently?

I don't know. I think it's kind of hard to tell with the variety of factors that are happening in China. Certainly, people have been hopeful that there's some kind of incentive that kicks in. But you still have some general economic malaise there and certainly some impact from the trade dispute. So I think the China forecast for '19 is a little bit better, so it was down 3.5% in '18. The forecast that I see shows it up 1.7% in '19. So by historical terms that's still not -- it's still fairly low for China.

Okay. I appreciate that detail. And then lastly for me, just from a modeling standpoint, is there any help you guys can offer on the sales wind-down of Home Furniture and Fashion Bed. I know Fashion Bed was probably roughly a $200-or-so million business last year, and Home Furniture half that businesses motion and half stationary, and that was probably around $370 million combined. How should we think about those 2 businesses in '19? I understand they're going to be smaller, but from a modeling standpoint, any help would be greatly appreciated.

Okay. Bobby, this is Mitch again. I'll take a shot and Wendy can jump in if there's additional detail. But on the -- let me talk about Home Furniture first. I think that we're making good progress there. We got a lot of good activity underway in terms of passing along price increases or shedding low-margin business. We made good project -- progress transferring production to our Chinese operations to take advantage of lower input cost. And we've been reducing overhead and operating cost and we'll look forward to further reduce excess capacity. I think you're starting to see that performance stabilize in the fourth quarter. We are moving aggressively and expect to complete the implementation largely by the end of the first half of the year. So for '19 in that business, I think we do see some shrinkage of sales, probably think about it in terms of, like, mid-single-digit. But with increased -- significantly increased earnings power on that side. On the Fashion Bed side, I think we'll see more significant sales declines as we continue to trim the product categories there and really focus on monetizing inventory. I would think about the sales decline there being closer in the 20% to 30% range with probably very little earnings impact.

Our next question comes from the line of John Baugh with Stifel.

I just have 2 questions. I guess, first, '19 guidance. Is there anything assumed around timing or rate on the antidumping situation?

John, no. That -- we continue to be optimistic, have every reason to be optimistic. The timing with the government shutdown is pushed out until end of May for the early determination. We do expect some positive impact but don't know how to quantify it. So we just -- we're -- we've kind of ignored it from a guidance perspective.

And then as a follow-up, could you comment one on the flooring weakness, what you saw both in the fourth quarter and maybe for the year -- last year, and what you're seeing right now. And then any way -- I appreciate the comment about not giving us units like boxsprings and obviously, they're in steep decline -- but how do we think about the dollar -- maybe the net dollar impact of gaining units on the adjustable side but then losing the boxsprings. What's that net trade?

I'll take the last one. Remember those 2 are in different segments. So they're reported differently with adjustables being in furniture and boxsprings being a subset of U.S. Spring in residential. But it's -- I guess the one word is significantly positive. The average unit selling price of an adjustable bed is in the $200 to $300 range, higher in some cases. And of a boxspring is probably $10 to $15. Remember, that's just a steel grid structure, so that trade is a good trade. There's other things going on, in that there are fewer bed frames sold because of the advent of box beds and platform beds, when there's fewer boxsprings, there's -- fewer bed frames and boxsprings correlate. So there's just a lot going on in those markets. As relates to flooring weakness, go ahead.

John, looking at the -- at Q4, and there were a few factors that kind of played into a little bit of a downdraft. First of all, we had some customers and then some secondary customers, which is secondary, I mean down the value chain. So during the fourth quarter, Mattress Firm went through a -- where they -- a period of time where they liquidated some excessive inventories. We also had that occur amongst some of our major customer groups during the fourth quarter. And then also we feel like, based on the conversations we've been having, that in preparation for the preliminary determination of the dumping duties, we saw a glut of dumped Chinese mattresses that have been exported into the U.S. And so as they work through that, we think probably through the first quarter, something like that, that had an effect definitely on fourth quarter results. The other thing, going back to Karl's comments on the effort to get in place a dumping order, with that delay, because of the government shutdown being pushed out, we now feel like that somewhere around the end of February, product that is landed would be subject to a 90-day look-back. And in a lot of cases that has a cooling effect because obviously an importer of record needs to understand their cost basis whenever they're importing product. So we still believe that somewhere around the end of May or somewhere along in there, we'll see that preliminary determination, hopefully it's favorable, and we'll repatriate to the U.S. product in place of some of that dumped product.

John, I think you also asked about flooring. Flooring, the external reports on carpet sales in the -- I'm sorry, the fourth quarter were that they were down 9% in square yards. So that led -- there's obviously a high correlation between our carpet cushion sales and carpet sales. Again, highly correlated with the housing market in total, so I think it's just that general softness. We have not at all lost share. The answer to your question, just through January the flooring products business is down about 2%, but -- with 1 fewer shipping day, so it's flattish in January.

Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey.

One question on Elite. Do you have a better feel at this point, what the purchase accounting hit in '19 is going to be on Elite?

Keith, this is Matt. We're still reviewing that, but the upshot is in the first quarter we will have some inventory accounting impact, it will be a few million dollars, we don't have it specifically quantified. And in bigger picture, we currently estimate that the goodwill associated with the transaction will be something around 40% to 50% of the purchase price. Don't know if that helps some of your modeling expectations. But that's all very much being finalized, and you'll certainly see all that as we get the K filed.

And did you amortize that goodwill over, kind of, what period of time? I know there's different parts of it, but some of it drops off after like 3 years.

That's just straightforward goodwill that will be on the balance sheet.

Okay. And then second question on LIFO, it was a negative here in the year as you discussed in the press release. Did it impact the fourth quarter? And what kind of expectations do you have in your guidance for 2019 on LIFO?

As of -- Keith, this is Matt again. As always we start the year not assuming we have a better crystal ball than anything else -- anyone else, and that we assume there will be basically flat LIFO to the year, neither income nor expense. Although you certainly heard Perry talk a bit about commodity trends right now, and trends will move around all throughout the year. But at the moment, we don't have any assumption of LIFO income or expense in the guidance we provided. And that's consistent with all of our past practice historically.

And I have to say, Keith, we expect full year LIFO will be lower than the $31 million it was in '18.

Okay. Did it play a role in the fourth quarter, positive or negative?

It was -- it was -- we had estimated at the end of the third quarter that it was going to be $33 million. And when we trued it up, as of the fourth quarter, it came in at $31 million.

So it basically came in almost spot on with what we thought 90 days before and that rarely happens, of course. But as you look forward to this year, we don't anticipate nearly that magnitude of LIFO expense in 2019, and for modeling purposes here we assume, right now out of the gate, that there won't be any LIFO income or expense.

And we'll estimate that each -- we'll update that estimate each quarter.

Keith, the impact to the fourth quarter of LIFO was $7 million.

Fourth quarter was $7 million, okay. $7 million negative, correct?

Yes.

Expense, that's correct.

Your next question comes from the line of Dan Moore with CJS Securities.

As it relates to Elite, it's been only a very short while now, but wondering what you've learned, if anything good or bad, since closing the acquisition?

Dan, it's -- you are right, it will be just 3 weeks tomorrow. But a number of us were at the Las Vegas furniture market last week. And Perry and I have had a number of conversations amongst ourselves and then with the Elite management team. And all I can tell you is thank goodness that we own that business. With the growth of hybrid products, the numbers of box bed mattresses that were displayed in Las Vegas, really, it's very, very early, but the predictions that we made in our analysis of the strategies around Elite are proving true, in that we're seeing a lot of box beds that are being sold or marketed to conventional brick-and-mortar environments that -- very, very apparent in Las Vegas. We're also seeing significant increased conversation around specialty foams and the attributes of specialty foams in terms of heat dissipation. So we feel, again, admittedly early, we're always cautious, but thank goodness we've done that deal. And what a fantastic group of managers and employees in that business. Culturally, there's such an incredible connectivity that, frankly, we're blessed to have them on the team.

Got it. And just a little bit of pencil sharpening. In terms of the remaining restructuring charges, do you expect those to be front-end loaded, more evenly spread through the year, any sense there?

First half-loaded for sure; there may be a little residual into the back half but heavily loaded to the first half.

Got it. And then lastly, little bit more philosophical but just a thought process, understanding you want to -- you're very cognizant of leverage and it's appreciated. But why automatically suspend share repurchases rather than kind of remaining opportunistic, given the really strong free cash flow outlook?

Dan, it almost sounds like you're trying to pick a fight between Matt and I, but -- because we had that conversation. It will be very difficult, based on our belief as to what the value of the equity is for us, not to repurchase shares if there's any fall-off in stock price. We are extremely bullish on the company's future and believe -- well, personal opinion, the stock is probably undervalued from a trade perspective right now. So it's difficult but we've made a commitment to the lenders and to ourselves that we'll continue to deleverage. For us to be at 3.5x is remarkably high in either Matt or I's history for sure. Perry has been here longer than both of us. So it will -- we'll continue to watch it but any melt off, it would be hard to [pounce]. But Matt and I will arm wrestle for that one later.

Yes, Dan. We are all certainly aligned with the considerations on our deployment of cash and capital, and the very good news is our cash flow is quite predictable typically. There's some seasonality to it but it is predictable, and we have a lot of it. So the deleveraging that we're earmarking to take place over the next 12 months to 18 months is something we feel very comfortable in estimating and that it will happen promptly.

Our next question comes from the line of Peter Keith with Piper Jaffray.

So just to follow on that last point, the operating cash flow $550 million is a pretty big step up from the $450 million run rate in the last 2 years. Could you just get us comfortable on, I guess, your comfort of that acceleration? What are the key levers you plan on pulling and what are the drivers?

Yes, Peter, this is Matt. I'll jump in and then Wendy and Karl, Perry and Mitch certainly can amplify. But first of all, don't be surprised, of course, that it reflects the ECS acquisition. And we have been very clearly stating that the sales expectation that will arrive from ECS this year is estimated to be $675 million. You'll also recall reading that we anticipate fully that the EBITDA margin on that sales base will be higher than the company average. So you could do math there to see that EBITDA will be driving significantly higher from this 2018 level of $573 million that we just posted company-wide for Leggett before we owned ECS. Secondly, as you saw in the fourth quarter, once again our working capital performance strongly ended the year. And I know both Mitch and Perry and certainly Karl are working hard to be able to not ride in that 12% range of working capital investment, which we did most of 2018. We're working hard to make sure that improved performance of a pretty significant nature by the end of the year is sustained throughout 2019. That will naturally flush up a meaningful amount of cash. And otherwise, when you think about -- go further through the cash flow statement, the capital spending is pretty predictable. We talked about M&A dialing down significantly, share repurchases, same as Karl just mentioned. So that circa $550 million of operating cash flow is readily correlated to the higher earnings, ECS being part of the family, working capital concentration and focus, and really no surprise uses of cash on the operating side. And again, we feel very confident about that expectation you should use in your model.

One bigger-picture follow-up, and I guess I'm just -- refer back to the TSR target, where you're looking for historically around 7% to 10% EPS growth. And this year, at the midpoint, I guess you're guiding for 3%. So there's sort of a lot of puts and takes in the business right now, but I was hoping you could maybe just provide a high-level sweep on what are the main challenges to not being in line with your TSR for 2019?

Yes, this is Wendy. I'll take a stab at it. If you think about EPS, it's going to be a big generator in the short term, and really over the -- at least the first 3-year period for the sales growth. We expect margin to be consistent. Of course, share repurchases are going to be lower. But as Matt said with a strong operating performance in ECS added to expected margin improvement in our other businesses, we think we're going to be able to achieve that 11% to 14% TSR. So think about it as long term, we're not changing our TSR target, and we are not changing the individual components of TSR. In the short term, while we -- for instance, suspend share repurchases, they'll change a little bit, but we think we've positioned the company well to achieve that 11% to 14%.

Okay. And maybe just a follow-up, I guess you've been speaking about the earnings growth ex buyback is at 7% to 10%. So the top line growth is a little light, the margins are kind of flat to down. If -- someone would say, why is Leggett not guiding [a line], could you just give us -- give any broad brush strokes on what the key challenges are for this year, even if those are going to go away looking out to 2020?

The key challenge is, well, we have the -- from an ECS perspective, we're dealing with the purchase accounting issue, which will be mitigated to some degree in time. So that's one issue. One of the challenges with doing an acquisition of that size, you kind of pay for it from an accounting perspective in year 1 to a lesser degree in year 2. There's certainly is uncertainty in the macro environment. It's difficult to guide in this environment. The other good -- earlier good question about tariffs, we don't know. Government shutdowns, we don't know. Brexit impact, we don't know. So we're coming up with the best guidance that we feel comfortable putting out there. And as Wendy said, those TSR targets are longer term, and we feel very comfortable as we sit here today that we'll be in that range.

(Operator Instructions) Our next question comes from the line of Justin Bergner with Gabelli & Company.

I guess just to start with ECS. Should I think of the increase in depreciation, amortization from sort of that $140 million run rate at the end of the year to $210 million, that, that step up is almost all ECS.

Virtually all.

Yes. So we've had some higher capital spending as you know in the last 2 years, but yes, the vast majority of that is associated with ECS.

Okay. So you're not adding back any ECS cost, outside transaction cost, in your adjusted EPS framework, correct?

We are not adding back any additional -- make sure I understand your question. So...

The only cost you're adding back for ECS are transaction costs.

Well, we've got the inventory write-up phenomena. It's an accounting [gap] treatment that will happen in the first quarter that we've talked about. Beyond that there's no significant add back in costs associated with ECS.

But the inventory costs will not be added back for your adjusted EPS framework. You'll eat that cost in the first quarter.

Yes.

Okay. Should I think of the 10% sales growth for ECS in 2019 maybe a little bit less than 10% sales because it's compared to a $611 million for the 12 months through September. I mean, it seemed like when you announced that deal, you might have had expectations for, sort of, sales growth more in the double-digit range. Has that tapered down or the end markets caused that view to taper down?

It's not -- Justin, this is Karl. It's not end markets. It’s deflation. So there's about 5% of the early expected growth in ECS that is being pulled back. Said differently, that the chemical input cost have decreased significantly. So the resultant sales dollars will be lower than originally expected, but the EBITDA margins will not be negatively impacted by that. So you are -- your observation is correct. The forecast is about a 10% growth. If raw material input cost would have stayed neutral, we would have been looking at about a 15% growth rate.

Okay. So when you said EBITDA margins will stay similar, do you mean EBITDA dollars will stay similar.

I should have said dollars.

Okay, that's what I thought. And then just 2 other non-ECS related questions. You mentioned in the earnings framework for 2019, you'll have some benefit from the timing related to steel pricing offsetting tax, keeping your margin profile, I guess, pretty constant at least organically. And I guess I'm wondering, why aren't you seeing any operating leverage besides deal timing related from the 0% to 3% organic sales growth, given that you should be seeing some benefit in your Fashion Bed and Home Furniture from the actions you're taking.

Justin, we do expect to see some margin improvement from our -- in the core Leggett business. Remember ECS is going to be slightly dilutive to EBIT margins. And in addition to higher tax rate, we've got higher interest expense, and we're going to have a higher share count. So we have a few small headwinds, if you will. But we do expect to see margin improvement in the core Leggett business.

Okay. That's helpful. And then lastly, any comment on Quantum Edge growth in the quarter. I think you spoke about last quarter.

Justin, this is Perry. Yes, Quantum Edge and the overall category of Comfort Core continues to grow. For the full year last year, our Comfort Core as a percentage of our innersprings is about 46%. It was a little stronger than that in the fourth quarter. And off those Comfort Core innersprings, in the fourth quarter, about 37% were Quantum Edge. That continues to grow. In fact, we saw a great representation of what we call ActivEdge, which encompasses Quantum Edge. It's all of those coil-encased products as opposed to foam-encased products. We saw a great representation of new introductions and existing product lines at the recently completed Las Vegas market. So we believe that content gain story that we've been preaching for some time now will continue throughout 2019.

There are no further questions at this time. I would like to turn the call back over to Ms. Watson for any closing remarks.

Thank you, everybody, for participating today, and we'll talk to you again next quarter.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.